August 9, 2012

Art Cashin Explains What The Fed's Next Bazooka Could Look Like

Sam Ro, writing for Business Insider, reprint's Art Cashin's analysis of the Fed's inability to spur the economy despite its best efforts, and what Chairman Bernanke may do next:

"Traders (both here and Chicago) think it may be an aggressive Operation Twist in mortgage backed securities (the original source of the problem).

The goal would be to drive margin rates to dramatic lower levels not seen in history. The strategy would be to make mortgage money so cheap that folks would virtually have to refinance. Others, seeing such low rates might be induced to buy other bargain basement priced housing and maybe rent it as income property."

Art Cashin is trading floor operations director for UBS at the NYSE, and a well-regarded sage. He publishes a daily piece titled Cashin's Comments, but I'm damned if I can find it online.

This is interesting speculation. By pushing lending rates even lower than current levels, the Fed would break the logjam of banks and borrowers sitting on the sidelines of the economy.

Imagine if you could refinance your home for thirty years at, say, 2.5%. You could keep your current payment level and take the benefit in less interest paid over a foreshortened mortgage, with the flexibility of making the occasional lower payment when circumstances dictate, or simply enjoy a lower monthly payment. Shorter-term loans would carry even lower rates.

The influx of new borrowers would increase the velocity of money through the economy, thereby stimulating growth (and perhaps stoking inflation, which to a moderate degree would be a good thing), while reduced monthly payments would free up cash for consumer spending, also stimulating the economy. All without a single word of political theater from candidates, Congress, or the White House.